Info Service on Climate Change (Mar18/05)
Lively debate at GCF Board on differentiated treatment of developing countries
Delhi, 8 March (Indrajit Bose) — The Board of the Green Climate Fund (GCF) discussed several policy matters in relation to funding proposals at its 19th meeting held in Songdo, South Korea, from 26 February to 1 March.
Among the most contentious were discussions on potential approaches for further guidance on the concessionality of the financial instruments and the investment criteria indicators.
Central to the contention were references to differentiation among developing countries based on their income status and their vulnerability levels, as was indicated in the documents prepared by the Secretariat on the respective topics presented to the Board for its consideration.
Responding to the differentiation among developing countries, several developing country Board members reiterated that the only differentiation in the United Nations Framework Convention on Climate Change (UNFCCC) is between developed and developing countries. Several Board members stressed that the GCF, being an operating entity of the Financial Mechanism of the Convention, should refrain from categorizing developing countries in categories that do not exist under the Convention, its Paris Agreement or the Governing Instrument (GI) of the GCF. (See highlights of interventions on the topics below.)
They cited paragraphs 35 of the GI on eligibility which states that “all developing countries are eligible to receive resources from the Fund” and paragraph 52 on the allocation of resources for adaptation, which states that “the Board will take into account the urgent and immediate needs of developing countries that are particularly vulnerable to the adverse effects of climate change, including the Small Island Developing States (SIDS), Least Developed Countries (LDCs) and African States.”
Some developing country Board members also said that it was wrong to interpret paragraph 52 of the GI as espousing differentiation among developing countries.
(At the 23rd meeting of the Conference of the Parties to the UNFCCC last year, in its guidance to the GCF requested “the (GCF) Board to ensure that all developing country Parties have access to all the financial instruments available through the GCF…” See related TWN Update).
Several developing country Board members also reiterated the nature of the institution and said that the GCF is a Fund, and not an investment bank.
One developing country Board member from South Africa also pointed out that 80 per cent of the poor lived in “middle-income” countries and the GCF must also respond to all the poor in developing countries.
Some Board members also said that several of the policy issues were inter-linked and a number of other policy issues remained to be addressed in an integrated manner. These included policies on co-financing and minimum benchmarks, which were also linked to the financial terms and conditions of the Fund’s instruments, investment framework and the risk management framework.
Towards the end of the discussions, the Board felt that more time was needed to flesh out these issues and for them to be considered together. The decision adopted reflects this consensus.
In the decision adopted on ‘incremental cost and concessionality’, the Board noted the linkages between incremental costs and concessionality and policy gaps such as project eligibility criteria and co-financing. It further noted that addressing the policy gaps requires an integrated approach, which addressed the inter-linkages.
The Board requested the Secretariat to develop an integrated approach to resolve the inter-related issues for the Board’s consideration at its 20th meeting and to include “steps to enhance the climate rationale of GCF-supported activities” and “policies on the review of the financial terms and conditions of GCF instruments and concessionality, incremental costs, full costs, and co-financing”.
The Board also requested the Secretariat to take into account the views expressed by the Board members at the meeting, and any further written comments before 30 March, the while developing the integrated approach.
The Board also requested the Secretariat to include in the approach “a capacity-building strategy to support national designated authorities/focal points, and accredited entities, particularly direct access entities, to incorporate these policies into their interactions with GCF….”.
In the decision on the ‘investment criteria indicators’, the Board also requested the Secretariat to further develop a proposal on the indicators based on the feedback received at the Board meeting, and for the Secretariat to bring back a revised version for the Board’s consideration at its next meeting.
Highlights of exchange on concessionality of financial instruments
In the proposed approach for adoption by the Board, the Secretariat informed that in some cases, funding proposals would not require justification for seeking concessionality from the GCF.
For non-revenue generating projects in LDCs and SIDS for instance, the Secretariat said that the maximum concessionality instrument not requiring further justification would be grants. This did not mean that others would not be eligible for grants but that they would have to provide a justification as to why they seek grants, it added. Elaborating further on the approach, the Secretariat said that for revenue generating projects in LDCs and SIDS, the maximum concessionality instrument not requiring further justification would be high concessional loans; and for revenue generating projects that are not in LDCs and SIDS, the maximum concessionality instrument not requiring further justification would be would be low concessional loans.
Zaheer Fakir (South Africa) said he was struck by the Secretariat’s presentation wherein the approach to looking at countries from the vulnerability perspective as well as distinction of countries based on some notion of income were both reflected. He stressed that the GI talked about vulnerability of all developing countries, particularly SIDS, LDCs and Africa.
Yang Weifeng (China) called for further refinement of the overall approach on concessionality, and that he had reservations on the approach espoused by the Secretariat, and that it contravened the GI and the UNFCCC. He added that the overall approach of the UNFCCC and the GI is two-fold; any rule applies to all developing countries and some flexibility or consideration is given to those that are particularly vulnerable to the impacts of climate change.
Ayman Shashly (Saudi Arabia) said that the document presented gave the Fund the identity of a multilateral development bank, whereas the Fund was an operating entity of the Financial Mechanism of the Convention, meant to support developing countries. He also added that he did not recognize the storyline in the document, which segregated developing countries. Shashly said that countries in their nationally determined contributions (NDCs) (under the Paris Agreement) had included the amount of money they need to unlock their mitigation potential, only to realize that if they came to the GCF, it would be in the form of loans (should the document be accepted).
Jorge Ferrer Rodriguez (Cuba) said that concessionality was linked to the incremental cost policy and the terms and conditions of the Fund’s instruments. Rodriguez further added that the paper presented looked like it belonged to a bank. He stressed that nowhere in the Convention is there is a list of vulnerable nations, adding that every country is vulnerable.
Ignacio Lorenzo (Uruguay) said that the document’s approach focused more on the characteristics of countries rather than that of projects. The Board, he said needs to see what degree of concessionality is to be delivered, regardless of country characteristics. He also cautioned against using terms that are not part of the GI, Convention and its Paris Agreement and added that a much more preferred approach on concessionality would be one that deals with the success of an instrument in terms of paradigm shift of a developing country.
Responding to comments, Josceline Wheatley (UK) asked who authorized the use of concessionality. “Is this some contrivance of OECD countries or the like? No, it is not. It comes from the Convention in Article 11. Concessional finance is mentioned there. It is in the GI, paragraph 54, and it is in numerous Board decisions.” (Paragraph 54 states that the Fund will provide financing in the form of grants and concessional lending.)
He said further that the Board had decided that there would be concessional finance but had not decided on how it was going to be applied. He also said that during the deliberations on the issue, he had a heard a problem regarding differentiation among developing countries and the suggestion that the corresponding part in the Board decision could be removed. He said that if there was no consensus on this approach, there could be a decision on how to tackle the issue.
Geoffrey Okamoto (US) spoke in favour of the proposed policy and said that the Board will find it very difficult to justify funding future projects, till clarity is achieved on the policies.
Omar El Arini (Egypt) said it was premature to discuss the issue, especially in isolation of other crucial policy issues. He also reiterated that the GCF was a Fund, not a bank. In response to Wheatley, Arini responded that concessionality is not included in the GI and that the GI only states that funds will be given on grant or concessional basis, whereas the Board was discussing the basis on which concessional finance would be effective in the Fund. He also said that if not for the letter of no objection (where accredited entities require a no objection from the NDA to submit a proposal to the GCF), there was no way for a government to know the interest rate on a loan. He suggested discussing eligibility criteria and incremental costs instead, which were priority. Arini also underscored that concessionality is important to developing countries for the sake of transparency and to know if the accredited entities are providing loans at or above market rate.
Highlights of exchange on investment criteria indicators
Introducing the issue, Kate Hughes (UK), the chair of the investment committee, said that the mandate for the work meant taking into account various national circumstances of countries and the “evidence review” pointed to having different indicators in SIDS, LDCs and Africa on some of the quantitative elements and different national circumstances underpinned each of the investment criteria.
The indicators proposed, for example, included expected change in losses of lives and direct economic losses under the impact potential investment criterion for adaptation. Then, for the needs of the recipient investment criterion, the adaptation indicator proposed was a vulnerability-based approach where vulnerability components such as exposure, sensitivity and adaptive capacity would have to be identified. For country ownership, alignment with the NDC was proposed as an indicator.
Responding to the paper, Yang Weifeng (China) said the approach seemed to divide developing countries into two groups and how national circumstances would be reflected was not very clear.
Zaheer Fakir (South Africa) said a lot of the things in the document were presented by breaking it into LDCs, SIDs and Africa. “The notion of LDCs, SIDS and Africa needs to be contextualized in the GI. It was based around adaptation, and it was not limited to SIDS, Africa and LDCs. It talked of all developing countries and those particularly vulnerable,” said Fakir. He said the paper requires a lot more work.
Jorge Ferrer Roriguez (Cuba) referred to the indicator of expected change in loss of lives and said that his country was hit by the worst possible hurricane last year, which resulted in economic losses to the tune of billions of dollars and damaged thousands of houses but only 10 lives were lost. He cautioned against using such an approach and said that the situation in developing countries was very diverse. He also used another example of country ownership indicator (alignment with NDCs) and said that some countries did not have NDCs, as they are for the post-2020 period (under the Paris Agreement.) He wanted to know how projects would be assessed in such cases. On classifying countries on their vulnerability levels, he said everyone is vulnerable, even the developed countries. “The difference is they have the technical capacity and money to deal with this but we don’t, unfortunately,” he added.
Satu Santala (Finland) said she could support the proposed approach as a pilot, even through the indicators were far from perfect. Regarding analyzing countries, she said she was puzzled (with interventions on country classifications) because the proposed indicators made it abundantly clear that countries’ varying national circumstances had to be taken into account. “I cannot help thinking of the many reports we get on the grave impacts on climate change but I am not hearing concerns or solidarity for those that suffer the most and those countries that have fewer means…in these conversations. We have the responsibility to think about that too,” she stressed.
Responding to Santala, Fakir said that every intervention they were making in the Board was with the poor in mind. “If you recall, 80 per cent of the world’s poor are in countries that will be prejudiced by the policies we take in this Fund. The World Bank will tell you that 80 per cent of the world’s poor live in ‘middle-income’ countries,” which are viewed to be much more capacitated and should not therefore receive the same levels of privilege as other countries. “The reality is we want to do something for all the poor around the world and in the countries that are vulnerable, like the SIDS, we want to do more, but we do not want to do more by prejudicing the others. It is with that approach we approach these things. We are trying to create a better life for all,” said Fakir.
(Edited by Meena Raman)